Why $45 an hour is a pay cut when it's your own truck

Quick answer: Your rate has to cover your pay, your overhead, your taxes and the benefits nobody hands you anymore, divided by the hours you can actually bill, not the hours you work. For most guys going solo, that number is more than double their old shop wage.

Picture a finish carpenter who leaves a shop paying him $32 an hour. He buys a used truck, gets his license and insurance, and starts charging $45. That's a 40 percent raise, and for about six months it feels like one.

Then the year closes out. Every number below is a made-up example, not a benchmark. In our example he billed about 1,130 hours, because that's what was left after driving, estimating, supply runs and chasing invoices. At $45 that's roughly $50,850 coming in. His truck, fuel, insurance, tools, phone and accountant ran about $30,000. That leaves around $20,850. Before taxes. He'd have made more sweeping floors at his old shop, and he'd have had his weekends back.

Nobody goes out on his own to take a two-thirds pay cut. He did it by pricing from the wrong end.

Start with what you need, not what the job "should" cost

Most guys pick a rate by looking at their old paycheck and adding a bit, or by asking what the other guys charge. Both are guesses. Build it from the bottom up instead.

1. Decide what you're paying yourself. Be honest and a little ambitious. Our carpenter's old wage worked out to about $66,500 a year at full time, so call it $70,000.

2. Add up every overhead dollar. Pull twelve months of bank and card statements and list everything the business eats: truck payment, fuel, commercial auto, general liability, tool replacement, blades and consumables, phone, software, license renewals, bookkeeping, the storage unit. In the example that's $30,000. Yours might be $18,000 or $50,000. Use your number.

3. Replace the benefits you lost. Your old employer covered part of your health insurance, maybe matched retirement, and paid you for holidays. Now that's all on you. The example uses $12,000 for health coverage and retirement contributions.

4. Set aside for taxes. In the US, a self-employed person pays both halves of Social Security and Medicare, which comes to 15.3 percent on top of income tax. Your old boss quietly paid half of that. In Canada you cover both sides of CPP. Your actual number depends on your deductions, your state or province and your structure, so a CPA should give it to you. The example sets aside $18,000.

Total in the example: $130,000 the business has to bring in before you've made a dime more than your old job.

Divide by billable hours, and don't flatter yourself

A full-time year is about 2,080 hours. Take off two weeks of vacation, holidays and a few sick days and you're near 1,880 hours on the clock.

But you don't bill all of those. You bill the hours your hands are on a customer's job. The rest go to the drive across town, the bid you didn't win, the trip back for the part the supply house shorted you, the Saturday morning doing invoices at the kitchen table. In the example he bills 60 percent of his clock hours, about 1,130.

$130,000 divided by 1,130 hours is about $115 an hour.

Not $45. Not $60. A hundred and fifteen.

Don't guess your own billable percentage. Track it for one month. Write down every hour you work and mark which ones a customer pays for. Most guys are surprised, and not in a good way.

Then add a cushion the business keeps

Everything above gets you to break-even on the life you planned. It doesn't pay for the slow February, the $4,000 transmission or the customer who takes 90 days to pay. So round up. In the example, $115 becomes $125. That extra is profit, and profit isn't your wage. It belongs to the business so the business can survive the months that go sideways.

Stop quoting hours if you can

Once you know your number, most homeowners will flinch at hearing "$125 an hour." They won't flinch at "$3,400 for the built-ins, installed and finished."

Quote by the job. Estimate the hours honestly, multiply by your real rate, add materials, and give one price. Two things happen. The customer compares your price to the value of the finished work instead of to his own paycheck. And when you get faster at a job you've done fifty times, the speed is yours. On hourly billing, getting better at your trade actually cuts your pay.

Flat pricing does bite you when you misjudge a job. Old houses hide things. The fix isn't going back to hourly. It's a written scope that says exactly what's included, a line that says hidden conditions get priced separately, and a change order signed before you do anything extra. Put others first, but don't be a pushover. "Can you just also..." is how a $3,400 job turns into a $2,100 one.

Mark up your materials

You picked them up, fronted the money, carried them in your truck, and you'll warranty the install. That's worth something. Plenty of trades add a markup on materials for exactly those reasons. Pick a percentage, put it in your pricing sheet, and use it every time so you aren't deciding on the fly with a customer staring at you.

While you're at it, take a deposit for materials before you order them. That way you're not financing somebody's kitchen. Some states cap home improvement deposits. California is the well-known one, so check your licensing board before you set your terms.

The guy down the road isn't your pricing department

There's always somebody charging half what you charge. Let him. He either hasn't done this math yet or he's doing it on your side of the ledger by cutting corners you won't cut. Either way, matching him means signing up for his year-end.

If you're winning nearly every bid you send out, you're too cheap. Losing some jobs on price shows your number is real.

In fairness, some markets really won't pay $125. A rural area with thin margins might top out well below that. But when the market won't carry your number, working for less isn't the answer. You fix one of the three things you control. Cut overhead, maybe a cheaper truck or a shared shop. Raise your billable percentage by grouping jobs by area and ordering smarter. Or move toward higher-value work in your trade, the jobs where skill actually shows.

Raising prices on the customers you already have

This is the part guys dread, and it's easier than you think. Give 30 to 60 days' notice, in writing, in plain words:

"Starting March 1, my rate for new work goes to $X. Anything we've already agreed on stays at the old price. I appreciate your business and I'm glad to answer any questions."

No apology. No three paragraphs about fuel prices. Most good customers won't blink. A few will leave, and they're usually the ones who were costing you money anyway.

And earn the number every day. Show up when you said you would. Put down drop cloths. Sweep up at the end of every day, not just the last one. Leave the job site cleaner than you found it, even if it was a mess when you got there. Customers can't judge a mortise and tenon, but they remember a clean driveway and a guy who called ahead. That's what makes $125 feel fair.

Before you send your next quote

• Track one month of hours and find your real billable percentage.
• List twelve months of overhead from your statements.
• Ask a CPA what to set aside for taxes.
• Run the math: pay plus overhead plus benefits plus taxes, divided by billable hours, then round up.
• Build a written scope and change-order form.
• Set your materials markup and deposit terms, and check your state's rules.

Our carpenter wasn't bad at carpentry. He was bad at arithmetic, and he was generous with the one resource he couldn't make more of. The work was never the problem.

He just never told anybody what his hour was worth, including himself.